The chain of stop lights along Bombay’s Marine Drive, called the Queen’s
Necklace, shimmers at night. At one end is the posh Malabar Hill, home to
the city’s elite. At the other end is Nariman Point financial district, where
office towers jut skyward.

The square-mile headland is home to the world’s priciest commercial property,
with rents as high as $125 per square meter per month. Realtors’ nirvana?
A multinationals’ mecca?

Hardly. Bombay’s shambles of a commercial-property sector is the shameful
outcome of the city’s failure to live up to its claim to be the financial
and corporate nerve center of India.

There hasn’t been a new Grade A office development in nearly five years.
Most buildings lack modern climate, security and safety control systems.
But it’s not all bad: The fact that none of the buildings rise above 35 floors
is a godsend given that their elevators are cramped and frequently break
down.

There have been at least four major blazes in landmark complexes in the past
decade. A handful of bus routes serves a district with more than 100,000
office workers, a small dusty lot passes for a car park and there are only
three decent restaurants.

Its excesses are not restricted to rip-off rents - penetration into the real-estate
sector by organized crime has reached epidemic proportions, fomented by economic
upheaval and leftist regulators.

Dubbed Slumbay after its infamous shanty sprawl, this city of 13 million
has severely restrictive property laws that hinder urban renewal, limiting
supply and keeping prices high. This has created a breeding ground for corruption
and intimidation. Disputes between conflicting land interests frequently
end in gunfire, with 10 deaths in the last two years linked to controversial
development deals.

Add in restrictions on foreign investors and financial-sector participation,
and it’s easy to see why many companies no longer make Bombay the automatic
choice.

For Bombay-based multinationals like Ford Credit India, headaches range from
the chronic shortage of expatriate-standard housing to trying to comply with
U.S. anti-corruption practices in Bombay’s murky market. American law requires
even the overseas arms of U.S. multinationals to adhere to a strict code
of business ethics forbidding gratuities, backhanders and untraceable money
transactions. Says Managing Director Ian Gosling: “Negotiating terms in Bombay
is a problem. There are no norms and there is a sense of difficulty in concluding
deals.”

Leading Indian and foreign companies like Reliance Industries Ltd., Essar
Group, Mafatlal Industries Ltd., Citicorp, Pfizer Ltd., Arthur Andersen &
Co. and McKinsey & Co., as well as the British Deputy High Commission,
have located their offices in Nariman Point - once estimated to account for
40 percent of India’s corporate wealth.

But these days many more opt for other, cheaper cities. Bangalore’s 75 percent-lower
rents are a magnet for high-tech companies like Intel, Hewlett-Packard, Motorola
and VeriFone. New Delhi won over Coca-Cola and PepsiCo and smaller Indian
cities like Hyderabad and Pune offer cost-effective alternatives.

Nandan Nilekani, deputy managing director of a leading Indian software defector
to Bangalore, has no regrets: “Who wants to hang by the straps for four hours
a day in a packed Bombay railway compartment?”

Long commutes on Bombay’s crowded suburban trains to work in substandard
offices are the product of ill-fated efforts to legislate wealth redistribution.
The federal Urban Land Ceiling Act, designed to prevent concentration of
land in too few hands, effectively blocks new residential or office projects.
Maharashtra state’s Rent Control Act caps rents at uneconomic levels, killing
the incentive for property owners to refurbish older buildings. And rising
land prices encourage owners to sit on prime land rather than redevelop it.

In this environment, slum-lords and criminals play an increasingly powerful
role in price fixing of large transactions.

“Real estate has not opened up like the rest of the economy,” says Aashish
Velkar, general manager at international property-management consultants
Colliers Jardine. “Investment in real-estate development by banks and financial
institutions is prohibited.”

Multinationals, however, can’t afford to wait. When the Korean conglomerate
Daewoo was choosing headquarters for its Indian car project two and a half
years ago, its first pick was Bombay. But eventually it chose half-priced
New Delhi because it offered proximity to its plant as well as value for
money. Explains Daewoo official Suvendu Amitabh: “You can’t put half your
expected turnover into real estate.”

K.S. Narahari, spokesman for IBM’s Indian subsidiary, Tata Information Services
Ltd., says: “Quality for multinationals is not just the quality of the apartment
or commercial block. It’s the entire package. The fact Bombay cannot offer
reasonably priced housing for executives within a convenient driving distance
puts people off.”

Rules covering inward investment in real estate don’t help either. Foreign
investors must form joint ventures with Indian partners with the outsiders’
share restricted to a maximum of 40 percent. Full foreign ownership is permitted
only if the government deems the proposed project “infrastructure.”

For Hong Kong-based Pacific Century Group, with joint-venture commercial
and residential projects under way in Bombay, it’s a calculated risk. “We’re
aware of the problems,” says Executive Vice President Arnie Tucker. “But
in the end it comes down to whether you believe you can make a reasonable
return on investment. We believe we can.”

Bombay still bills itself as a commercial center with a centuries-old tradition
of international commerce, good communications and a can-do culture. Prakash
Hebalkar, a consultant who advises companies planning their India strategies,
claims: “Bombay works. It is more efficient than any other city in India.”

Like everything else, real estate has been hurt by civil unrest, growing
awareness of Bombay’s restrictive laws and investor fears spurred by Maharashtra’s
government annulling and then renegotiating a $2.1 billion Enron Corp. power
project. Vinod Rohira, head of sales at K. Raheja, one of India’s largest
real-estate development companies, says: “Average prices are down by 25-30
percent but everybody who wants to buy is waiting for prices to come down
further and everyone who wants to sell is waiting for the boom to start again.”

Multinational tenants complain of cash under-the-table demands by tax-dodging
landlords, and property-law ambiguities make even straightforward transactions
problematic. Says a spokesman for another automobile joint venture: “There
were options we explored in Bombay, but we realized that legitimacy of property
deals could be an issue. Sometimes properties are owned by people who are
fronts. We decided to shift to Madras, where there are fewer bureaucratic
headaches and dealings with shady figures.”

Hit men have left three textile-mill owners, five developers and a union
leader dead. A 1980s strike killed the city’s textile industry, but pro-worker
legislation prevented mill owners from formally closing their plants and
divesting their assets. Unions blocked all deals, demanding that workers
who lost their jobs be compensated first. The conflict turned deadly when
owners illicitly sold land behind the back of the unions.

The Rent Control Act stops owners from raising rents, and there has been
at least one suspicious death of a rent-controlled tenant who refused to
vacate. Sanjay Pande, deputy police commissioner for economic crimes, explains:
“Real-estate finance is controlled by the mob. Every builder, big or small,
has to pay protection money.”

Some companies, including Reliance, Citicorp and Lintas, have moved their
back-offices or executive-housing projects to midtown and uptown locations.
But India’s corporate-sector response so far has been lame, with ambitious
plans for quality projects designed by international architects as solid
as sandcastles.

The state government’s new international airport is still a pipe dream and
the $5.6 billion Bandra-Kurla financial center scheme, promising a large
convention center, office towers and a diamond bourse, has only recently
got off the ground. And four years on from a high-profile recovery blueprint
slated to revive Bombay as a services capital and develop leather-processing,
diamond-processing and ship-breaking sectors, the plan is no closer to materializing.